Emerging markets weaken as rates climb; cash prices lower as spreads continue to hold in

By Rebecca Melvin

New York, Feb. 2 – Emerging markets bonds were weaker on Friday with dollar prices dropping as U.S. Treasuries and stocks fell. But on a spread basis, the market was only marginally weaker, a New York-based trader focused on Latin America debt said.

“Things are holding in reasonably well, given everything that is going on,” the trader said.

On the heels of a positive U.S. non-farm payrolls report for January, bond prices fell as investors anticipate that more workers earning paychecks and higher wages will create higher inflation, a signal to the U.S. Federal Reserve to raise interest rates.

Non-farm payrolls rose to a seasonally adjusted 200,000 in January, the Labor Department said on Friday. That was better than the expected 180,000 job increase for the month, according to a survey by Thomson Reuters. And it represented a jump from last month’s 148,000 nonfarm payrolls growth, which missed expectations.

The unemployment rate held steady at 4.1%, and the average hourly paycheck for private-sector workers grew 2.9% in January from a year earlier. The average workweek decreased however, so average hourly earnings for private-sector workers grew only 0.34% for the month, about comparable to the 0.3% economists had expected, partially reflecting minimum wage increases across 18 states.

U.S. Treasury prices fell, sending the yield on the benchmark 10-year note up to 2.852%, from 2.773% on Thursday, and representing the biggest single-day climb in four months and its highest level in four years.

Rates have been drifting higher in recent weeks and continued to lift even after Federal Reserve policy makers stood pat on rates on Wednesday and signaled that three rate raises were still in the cards for this year.

U.S. equities tanked. The Dow Jones industrial average fell 665.75, or 2.5%, to 25,520.96 on Friday. The S&P 500 stock index lost 2.1%, and the Nasdaq fell 2%. Crude oil was also lower, with the West Texas Intermediate benchmark dropping 0.5% to $65.45 a barrel.

The emerging primary market was largely quiet on Friday, but for the week there were a decent number of new issues announced and priced. In Latin America, most of the new deals were from so-called “standard issuers,” with higher and more established credit quality, so the trading action in those names was not as dynamic, a trader said.

The $4 billion of additional notes from Petroleos Mexicanos SAB de CV that hit the market on Thursday, in addition to liability management transactions in which the Mexican oil and gas company is tendering and exchanging for a number of short- and longer-dated maturities, pulled that company’s bonds into the forefront of trading action on Friday.

The Pemex 6¾% notes due 2047 were trading actively and down about half a point, according to Trace data, to about 104.15, down from 104.75 on Thursday.

The Pemex 6 7/8% notes due 2026 were also down a little more than half a point to 112.35 from about 112.95 on Thursday.

The Pemex 5½% notes due 2044, of which about $926 million is being exchanged out of $2.66 billion principal amount outstanding, were little changed at about 92.25 from 92.3 on Thursday.

Pemex priced on Thursday $4 billion of new 5.35% senior notes due 2028 and 6.35% notes due 2048 at par.

The notes of Brazil’s Petroleo Brasileiro SA, which sold $2 billion of 5¾% notes due 2029 last week, were also lower.

Petrobras’ 5¾% notes due 2029 were last at 97.25, down from 101 on Thursday.

Petrobras’ 5 5/8% notes due 2043 were down to near 88 from 89.1 earlier Friday and from 89.32 on Thursday.

“Brazil always trades a ton, but on a spread basis, it was not moving that much,” a market source said on Friday.

Elsewhere, China Cinda Asset Management Co., Ltd. priced $2.5 billion of bonds in four tranches under its medium-term note program.

The company priced $800 million of 3 7/8% five-year notes at 99.591, $300 million of 4 3/8% seven-year notes at 99.732, $1.2 billion of 4¾% 10- year notes at 99.717 and $200 million of 5% 30-year notes at 98.472.

There was also word of India’s Yes Bank Ltd. pricing $600 million 3¾% five-year senior unsecured notes at 99.657, under its medium term note program, according to a release on Friday.

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